Econ exam 2

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Price Control
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A government law or regulation that sets or limits the price to be charged for a particular good.
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Price Ceiling
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A government price control that sets the maximum allowable price for a good.
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Price Floor
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A government price control that sets the minimum allowable price for a good.
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Rent Control
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A government price control that sets the maximum allowable rent on a house or apartment
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Price elasticity of demand
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the percentage change in quantity demand of a good divided by the percentage change in the price of that good.
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Unit- free measure
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A measure that does not depend on a unit of measurement
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Elastic demand
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Demand for which the price elasticity is greater than one
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Inelastic demand
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Demand for which the price elasticity is less than one.
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Perfectly inelastic demand
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demand for which the price elasticity is zero, indicating no response to a change in price and therefore a vertical demand curve
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Perfectly elastic demand
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demand for which the price elasticity is infinite, indicating an infinite response to a change in price and therefore a horizontal demand curve.
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Cross- price elasticity of demand
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The percentage change in the quantity demanded of one good divided by the percentage change in the price of another good.
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Price elasticity of supply
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The percentage change in quantity supplied divided by the percentage change in price.
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Perfectly elastic supply
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Supply for which the price elasticity is infinite, indicating an infinite response of quantity supplied to a change in price and therefore a horizontal supply curve.
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Perfectly inelastic supply
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Supply for which the price elasticity is zero, indicating no response of quantity supplied to a change in price and therefore a vertical supply curve.
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Utility
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A numerical indicator of a person’s preferences in which higher levels of utility indicate’s a greater preference.
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Marginal utility
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The increase in utility when consumption of a good increases by one unit.
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Diminishing marginal utility
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The tendency for consumer to derive less additional benefit from adding to the consumption of a good as consumption of that good increases.
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Budget constraint
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An income limitation on a person’s expenditure on goods and services
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Utility maximization
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An assumption that people try to achieve the highest level of utility given their budget constraint.
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Income effect
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The amount by which the quantity demanded falls because of the decline in real income from a price increase.
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Substitution effect
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The amount by which quantity demanded falls when the price rises, exclusive of the income effect.
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Marginal benefit
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The increase in the benefit from, or the willingness to pay for, one more unit of a good.
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Individual demand curve
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A curve showing the relationship between quantity demand of a good by an individual and the price of the good.
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Market demand curve
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The horizontal summation of all the individual demand curves for a good; also simply called the demand curve.
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Consumer surplus
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The difference between what a person is willing to pay for an additional unit of a good
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Firm
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An organization that produces goods or services
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Price- taker
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any firm that takes the market price as given

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